Interpublic Group Amazes in 3Q – Analyst Blog
The Interpublic Group of Companies Inc. (IPG) reported outstanding numbers during the third quarter of fiscal 2010. Net income was $42.4 million, significantly up from $17.2 million in the year-ago quarter.
Earnings per share (EPS) also shot up to 8 cents, up from just 3 cents in the year-ago quarter. EPS was a penny above the Zacks Consensus Estimate of 7 cents. The growth was attributable to increased revenues and strict control over costs.
Total revenue grew 9.4% to $1,560.6 million, up from $1,426.7 million in the same period of fiscal 2009 based on various strategic investments and the improvement in economic conditions, which boosted client-spends particularly in the auto, retail and financial services sectors.Total revenue increased organically by 9.4% year over year. Reported revenues also beat the Zacks Consensus Estimate of $1,519.0 million.
United States, which contributed 58.7% of total revenue, stretched 9.9% to $916.7 million and International revenues grew 8.7% to $644.1 million.
Operating expense was up 6.7% and reached $1,460.6 million from $1,368.4 million in the corresponding quarter of the previous year. However, as a percentage of revenues, it declined 230 basis points. Operating margin grew to 6.4% from 4.1% in the year-ago quarter.
At the end of the quarter, cash and cash equivalents remained at $1.94 billion, equivalent to the previous quarter, but were up from $1.77 billion at the end of the prior-year quarter. Total debt increased marginally to $1.94 from $1.91 billion at the end of the previous quarter. This proves that the company has a strong liquidity position with the capability to pay off its debt out of present cash.
Outlook
Although, the company did not provide any guidance for fiscal 2010, the Zacks Estimate is 41 cents, more than double the EPS of 19 cents in fiscal 2009.
We raise our earnings estimate for the upcoming year compared to fiscal 2009 based on our optimism on the market. Since the beginning of 2010, the overall market and economic conditions have improved. Client-spends particularly in the auto, retail and financial services sectors have improved.
Moreover, we believe that Interpublic Group’s continued strategic investments and a strong liquidity position in the present conditions will help it to capitalize in the emerging markets. Further, Interpublic Group’s cost containment initiative will position itself for future growth.
However, the company operates in a highly competitive market, which could substantially have a negative affect on its business. Hence, we reiterate our Neutral recommendation on the stock, which currently retains a Zacks #3 Rank (short term Hold rating).
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ITT Beats EPS Estimate, Ups Outlook – Analyst Blog
ITT Corporation (ITT) released its third quarter earnings result before the market opened today, reporting earnings per share from continuing operations of $1.08 and outperforming the Zacks Consensus Estimate of 99 cents.
Earnings were up 6% year over year. Increased revenue from commercial business and operating efficiency of the company were the driving factors for good results in the quarter.
Revenue
Total revenue was $2.68 billion, up from $2.55 billion in the third quarter of 2009. The quarterly revenue was slightly below the Zacks Consensus Estimate of $2.69 billion.
Defense & Information Solutions revenue declined by 9% to $1.4 billion, led by decreased sale of counter improvised explosive device units and tactical radios, weak software engineering services revenue and low shipments of night vision goggles. This was partially offset by growth in special purpose jammers, radar and composite structures.
The segment also benefited from improved activity under the Automatic Dependent Surveillance-Broadcast (ADS-B) air-traffic control program. Though a decline in revenue was a bit discouraging, this was overshadowed by 100% sequential rise in order, which also surged 25% on a year-over-year basis.
Fluid Technology revenue was $920 million, up 3% organically, driven by worldwide growth in municipal market, good performance in North American residential market and growth in the emerging markets. Orders in the quarter spiked 5%.
Motion and Flow Control revenue increased organically by 22% to $360 million, led by improved auto, connectors and general industrial markets. Emerging markets also contributed significantly to segment growth. Orders increased by 20%.
Income & Expense
Operating loss was $32 million in the quarter compared with a profit of $89 million in the prior-year period. Operating loss in the quarter was primarily due to high SG&A expense ($396 million) and asbestos-related costs ($341 million).
Segment wise, operating income was up 11% in Defense & Information Solutions, 7% in Fluid Technology and 13% in Motion & Flow Control.
Balance Sheet
Cash and cash equivalents was $912 million at the end of the quarter, with long-term debt of $1.4 billion and shareowner’s equity of $4.3 billion.
Cash from operations was $654 million year-to-date and free cash flow was $480 million.
Outlook
Better-than-expected third quarter results led the company to increase its 2010 adjusted earnings per share guidance range to $4.28 – $4.32 from its prior expectation of $4.08 – $4.18. Revenue is expected to grow approximately 4% to $11 billion. Organic growth is expected to be 2%.
ITT plays an important role in vital markets, including water and fluids management, global defense and security, and motion and flow control. It possesses leading brands in the Fluid Technology and Motion & Flow Control businesses. The company is well diversified and serves attractive end markets with a broad geographic footprint.
However, adverse macroeconomic and business conditions, particularly in the local economies of the countries or regions, where the company operates, may negatively affect its revenues, profitability and operations.
The company’s Defense Electronics and Services segment develops, manufactures and supports high-technology electronic systems and components for worldwide defense and commercial markets, and provides communications systems and engineering and applied research. Principal manufacturing facilities are located in the United Kingdomand the US.
ITT Corporation is a global multi-industry leader in high-technology engineering and manufacturing. It is engaged in the design, manufacture, and sale of a wide-range of engineered products and the provision of services. Major competitors of ITT are Lockheed Martin Corporation (LMT) and Raytheon Co. (RTN).
We currently maintain our Neutral rating on ITT Corporation, with a Zacks #3 Rank over the next one-to-three months.
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Maxwell Tech Reports in Line – Analyst Blog
Energy storage and power delivery products maker, Maxwell Technologies Inc. (MXWL) reported third quarter 2010 adjusted earnings of a penny per share, in line with the Zacks Consensus Estimate and soundly beat the year-ago quarterly loss per share of 4 cents. On a reported basis the company had a per share loss of 9 cents compared to a loss of 18 cents in the year-ago quarter.
The 10-cent variance in the reported period between the reported and adjusted earnings came from the impact of amortization of intangible assets (1 cent), a potential settlement with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) (6 cents) and loss on embedded derivative and warrants (3 cents).
Operational Performance
Maxwell Technologies’ revenue was $31.5 million in the third quarter 2010, up 21% from $26.1 million in the year-ago quarter, beating the Zacks Consensus Estimate of $31 million. Ultracapacitor revenue was $18.6 million, up 78% from $10.5 million in the third quarter of 2009.
Revenue from high voltage capacitor and microelectronics products was $12.8 million, down 18% from $15.6 million in the year-ago quarter. In the third quarter 2010, Maxwell had a gross margin of 39% versus 38% in the year-ago quarter. Net loss for the third quarter 2010 was $2.4 million compared with a net loss of $4.6 million in the year-ago quarter.
Financial Condition
Maxwell Technologies’ reported cash and cash equivalents of $32.1 million compared to $29.6 million at fiscal-end 2009. Long-term debt decreased to $4.1 million in the reported quarter from $11.5 million at fiscal-end 2009.
Outlook
Maxwell Technologies is a leading manufacturer of ultracapacitors, high-voltage capacitors and microelectronics products. The company recorded consistent growth in its quarterly top-line in the recent past.
Looking ahead, the strong demand trend will continue for the company’s products related to the utility infrastructure, renewable energy, public transportation, and space programs. Also its key end-markets appear likely to benefit from government stimulus programs as well as more stringent automotive emissions legislation.
The European Union has taken the lead in enacting legislation requiring carbon dioxide emission reduction targets and levying penalties on vehicles whose emissions exceed the mandated limit. In the U.S., the Obama administration is focused on increasing federal investments in greener transportation technologies through laws like the Corporate Average Fuel Economy (CAFE) standards for U.S. automakers.
Maxwell Technologies expects its sales to grow 5% - 7% sequentially in the fourth quarter 2010.
We presently retain a short-term Zacks #3 Rank (Hold) and a longer-term Neutral recommendation on the stock.
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Beckman Beats, Reaffirms Guidance – Analyst Blog
Beckman Coulter (BEC) reported an EPS of 95 cents in the third quarter of fiscal 2010, compared with 2 cents in the year-ago period. However, adjusting for certain special items, restructuring and the acquisition of Olympus Diagnostic, the company’s EPS came in at $1.00, surpassing both the Zacks Consensus Estimate of 88 cents and 89 cents in the year-ago quarter.
Beckman reported revenues of $893.8 million, up 8.6% (up 9.8% at constant exchange rates or CER) from the year-ago quarter and exceeded the Zacks Consensus Estimate of $884 million. Olympus contributed $112.2 million to total revenues. Although recurring revenues increased 6.9% annually (8.3% at CER) it would have grown 4.2% excluding the impact of Olympus.
Beckman’s two segments, Clinical Diagnostics and Life Sciences, recorded revenues of $787.6 million (up 10.8% annually or 11.9% at CER) and $106.1 million (down 5.1% or down 4.1% at CER), respectively.
Within Clinical Diagnostics, the highest growth was recorded by Chemistry and Clinical automation (14.3% to $323.2 million), followed by Immunoassay and Molecular Diagnostics (up 10.5% to $220.2 million), and Cellular Analysis (up 6.7% to $244.2 million). Strong growth recorded by chemistry and automation is primarily due to the acquisition of Olympus Diagnostics in August 2009.
On a geographic basis, all the markets recorded robust growth (at CER). The highest was Emerging Markets with an annualized growth rate of 23.7% to reach $80.3 million.
While Beckman derived 47% of its revenues from the US market ($423.2 million), its growth was lowest at 5.2%. Europe with revenues of $178.7 million and Asia Pacific with $155.5 million of revenues recorded growth rates of 6.5% and 22.2%, respectively. Revenues derived from the Other region (Canada and Latin America) increased 9.3% to $56.2 million.
Although Beckman recorded robust growth in Asia-Pacific and emerging markets, revenues derived from the developed countries were lower due to soft demand. Revenues from the US market will continue to see pressure until the quality challenges are resolved. The company is currently focused on increasing customer satisfaction, which is expected to drive revenue growth in future.
On June 21, 2010, Beckman received a warning letter from the US Food and Drug Administration (FDA) regarding troponin test kits. The agency claimed that the company has made certain modifications to its AccuTnI troponin test kits as used on UniCel DxI Immunoassay systems and Access Immunoassay systems without obtaining appropriate product clearances from the FDA. The company also provided an update regarding its studies to resolve the issue.
In agreement with the FDA, Beckman is conducting the troponin clinical study and has already completed Stage One (study design) of the troponin clinical trial, which has been reviewed by the agency in May 2010. In Stage Two (study set-up) and Stage Three (study execution) of the study, the company has identified sites that meet the requirements for patient recruitment and are collecting samples from the intended population.
We note that the company expects completing the clinical study in time so that two separate 510(k) submissions for the troponin test can be submitted in the first half of 2011 – one for Access instruments and the other for DxI instruments.
Beckman exited the quarter with cash and cash equivalents of $284.6 million, marginally down from $288.8 million at the end of December 2009. The company has increased its quarterly cash dividend by 5.6% to 19 cents per share.
Outlook
Beckman reaffirmed its guidance for fiscal 2010, which was provided along with second quarter results. The company expects revenues and adjusted EPS in the range of $3.65–$3.70 billion and $3.90–$4.00, respectively with $480-$500 million of contribution from Olympus products.
Moreover, recurring revenue growth, (excluding Olympus acquisition) in CER is expected at 5% comprising of 1% growth in the US and 9% in the international market.
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Edison International Profits Climb – Analyst Blog
Edison International's (EIX) adjusted EPS of $1.46 in the third quarter of fiscal 2010 jumped the Zacks Consensus Estimate of $1.18 by 28 cents. It also beat the year-ago period earnings of $1.09. Outperformance in the quarter was driven by better than expected results at both Southern California Edison (SCE) and Edison Mission Group (EMG).
On a GAAP basis, the company reported an EPS of $1.56 compared with $1.22 in the year-ago quarter.
Operational Results
Edison International's revenue climbed 2.7% to $3.8 billion in the reported quarter, compared with $3.7 billion a year earlier. Revenues were short of the Zacks Consensus Estimate at $4.2 billion. In the third quarter, Electric Utility revenues increased $29 million to $3.1 billion, while Competitive power generation revenues increased $95 million to $691 million.
Segment Results
Southern California Edison's GAAP EPS in the reported quarter was $1.21 compared with $1.06 in the year-ago quarter. Adjusted earnings shot up 17.4% year over year to $1.08 from 91 cents last year. The increase in adjusted earnings was due to higher authorized revenue to support rate base growth and higher capitalized financing costs.
Edison Mission Group's reported GAAP EPS was 34 cents per share compared with 19 cents in the year-ago quarter. Adjusted losses were 37 cents per share compared with 19 cents in the same period last year. The improvement in earnings reflects higher operating revenues from Midwest Generation and Homer City, primarily from higher average realized energy prices, higher capacity revenues, and a gain from the sale of bankruptcy claims.
Edison International's parent company and other reported GAAP EPS of 1 cent per share compared with a loss of 2 cents in the year-ago quarter, mainly due to consolidated income tax benefits.
Financial Condition
At quarter-end, Edison International reported cash and cash equivalents of $2.0 billion, up from $1.7 billion at year-end fiscal 2009. Long-term debt increased to $12.1 billion as of September 30, 2010 from $10.4 billion at the end of fiscal 2009.
The company’s cash from operating activities at the end of the reported period was $2.8 billion compared to $2.1 billion in the year-ago period.
Outlook
Edison International increased its adjusted earnings guidance for fiscal 2010 in the range of $3.45-$3.60 from the previous guidance of $3.15-$3.45, based on strong year-to-date performance. The company also raised its GAAP earnings guidance range for the period to $3.88-$4.03 from the earlier guidance range of $3.48-$3.78.
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Steel Industry Outlook – Nov. 2010 – Industry Outlook
The U.S. houses one of the world's largest steel industries. It is rather concentrated in structure, with a few producers accounting for the lion’s share of sales. ArcelorMittal (MT) is the world’s largest steel company, with crude steel production of 73.2 million tons in 2009, representing about 6% of the global steel output.Steel products are classified into four broad categories: flat steel products, long steel products, scrap and semi-finished products. Flat products include plates, hot-rolled strip and sheets, and cold-rolled strip and sheets. The long steel product category comprises wire rods, beams, reinforced bars and merchant bars. The products under both these categories are rolled from steel slabs, which are considered as unfinished or semi-finished products that are generally not sold.
Historically, the automotive and construction markets have remained the largest consumers of steel, absorbing more than half of the total steel produced. Large automakers such as General Motors (MTLQQ), Ford Motor Company (F), Toyota Motor Corporation (TM) and Honda Motor Company (HMC) depend upon the steel industry. Other steel consuming industries include appliances, agricultural implements, converters, containers, energy, electrical equipment and industrial machinery.
Growth Trends
Accelerating demand in the automobile and construction markets triggered production growth in the steel industry before the recession hit. However, the global economic turmoil that started at the end of 2008 and continued through much of 2009 severely impacted both these markets, with the demand for steel nose-diving as a consequence. Steel manufacturers saw inventories soaring and scrambled to cut production.
With the global economy picking up in late 2009, the steel industry started seeing signs of improvement. However, given its economic sensitivity, we expect global steel demand to improve only gradually, in line with the recovery in the user industries, especially automotive and residential construction. According to World Steel Association (“worldsteel”), steel demand in the U.S. was down 41.6% in 2009 at 57.4 million tons. However, with the economy in recovery mode, the industrial sector is expected to drive a 26.5% increase in steel demand in the U.S. in 2010 and a further 7.5% in 2011 to 78.1 million tons.
The emerging economies reflected growth trends throughout the recession and are expected to continue to drive steel demand, going forward. Worldsteel expects steel demand in India to grow 13.9% and 13.7% in 2010 and 2011, respectively, following a growth of 7.7% in 2009. The European Union experienced a 35.2% decline in steel demand in 2009. Spain and Italy saw a significant fall in steel production with the breakdown of their construction market.
According to the association, in 2010 the European region will see an increase of 13.7% in steel demand, driven by the restocking of inventory. Japan would see steel demand rising 10.3% in 2010 after a 31.7% fall in 2009.
However, worldsteel expects Chinese steel consumption to increase by a modest 6.7% to 579 million tons in 2010, after an impressive 24.8% increase in 2009. Expansionary Chinese economic policies, easy credit and construction initiatives have thus far sustained demand. But with China attempting to rein in its overheated property sector and engineer a soft landing for its economy, steel demand will most likely soften noticeably in the coming months.
Globally, worldsteel anticipates steel demand to rise 10.7% to 1,241 million tons in 2010 in contrast to last year’s decline of 6.7%. For 2011, worldsteel expects global steel requirement to inch up 5.3% to 1,306 million tons.
Production Scenario
The year 2010 started well for the steel industry, with improving demand conditions in several end markets, leading to a steady rise in steel production worldwide. All major steel-producing countries -- Brazil, China, Germany, Japan, Russia, Turkey, the U.S. and Ukraine -- have recorded healthy production so far this year. According to worldsteel, North American steel output jumped 50.3% year over year to 74.8 million tons in the first 8 months of 2010. However, it is still lagging the 19.4% growth rate seen in 2008.
In the European Union, steel production shot up 37.5% to 115.6 million tons in the first 8 months of 2010 while production in Asia climbed 17.8% to 592.7 million tons. Of this, China experienced a 15.3% production growth to 425.7 million tons while Japanese production leapt 38.1% to 72.7 million tons over the first 8 months. Over the same period, steel production in Brazil soared 40.5% to 22.1 million tons and that in Russia jumped 15.4% to 43.8 million tons. In Ukraine, steel production moved up 11.7% to 21.2 million tons.
Industry Capacity
The global steel industry is capital intensive, cyclical, highly competitive and has historically been characterized by overcapacity. Capacity utilization rates were, however, low (around 60%) at the beginning of 2009, in response to the much softer demand. With steel demand picking up in the latter half of the year, capacity utilization rates increased to above 70%. Utilization rates continued to increase in the first half of 2010, averaging at over 80%. The capacity utilization rate has, however, come down to around 70% again since then.
Steel makers continue to add capacity besides resuming operations at the idled facilities, inspired by the expected rebound in steel industry in the longer term.
Price Trends
The steel industry has long witnessed volatility in prices with a large spot market. Steel prices rose steadily for most of 2008, after which there was a downtrend. Lower prices had an adverse effect on steel producers, who recorded lower revenues and margins, and had to write down finished steel and raw material inventories.
The period witnessed major steel producers slashing production to minimize inventory accumulation. U.S. Steel Corporation (X), the fifth-largest steel producer worldwide, cut down production by almost 62% during the second quarter of 2009, while Korean steel maker POSCO (PKX) cut production by about 15%. This was the first time in its history that POSCO was forced to adopt such a measure, proof of the very adverse operating environment.
Although steel prices have been stabilizing since the latter part of 2009, it is significantly below the pre-crisis level. We believe that a sustained recovery in steel prices remains uncertain in the backdrop of sluggish economic activity.
Factors Affecting Steel Prices
Chinese Imports: The steel industry is also affected by fluctuations in steel import–export and tariffs. China is the largest steel producer globally, with the balance between its domestic production and consumption being an important factor in global steel prices. Consumers in the U.S. are importing cheaper steel from China, which is forcing domestic steel producers to sell at lower prices, and even at a loss, sometimes. To this end, the U.S. government has been imposing anti-dumping duties on Chinese steel imports.
Concerns about the sustainability of economic recovery and question marks about China’s growth momentum come into play in the pricing equation. This relatively uncertain China outlook, coupled with a still tentative recovery in the developed world, is expected to weigh on prices.
Threat from substitutes: Steel has many substitutes like aluminum, which replaces it in the automotive markets. Cement, composites, glass, plastic and wood are also used as steel substitutes. This significantly influences market prices and demand for steel products.
Raw Material Trends
The key input for steel production is iron ore. Apart from this, coking coal and coke, scrap, electricity and natural gas are also used as inputs in steel production. The raw materials industry is highly concentrated with only three major players -- Vale (VALE), Rio Tinto (RTP) and BHP Billiton (BHP) – having significant pricing power. The risk lies in consolidation among raw material suppliers. For instance, the announced iron ore joint venture between mining companies BHP Billiton and Rio Tinto would further increase the pricing power of both the suppliers.
Steel makers would face higher production costs if suppliers shift to sales based on spot prices from the long-term fixed price contract system, as spot prices for most of the raw materials, especially iron ore, remained high from 2006 through 2008. In 2009, iron ore prices, which are linked with the London Metal Exchange prices, were about 28% to 33% below the benchmark prices.
Iron ore prices have remained volatile during most of 2010 and are expected to rise sharply in 2011. AK Steel Holding Corporation (AKS) expects a 65% rise in benchmark iron ore prices in the near term. The company assumes reduction of its earnings by $11 million or $7 per ton for each 5% increase in iron ore prices. The prices of coking coal, zinc and nickel, as well as scrap, have followed a similar trend.
Consolidation
Mergers and acquisitions (M&A) have remained an important business strategy in the steel industry. M&A activities prevent additional steel capacity, providing production efficiency and economies of scale. The biggest example is Mittal Steel’s acquisition of Arcelor in 2006 and their merger in 2007. The Tata Steel and Corus merger in 2008 is another good instance of industry consolidation. The industry is likely to see more M&A activity in the coming years as the industry players prepare themselves for a recovery in the long run.
Zacks Recommendation
Iron ore pricing concerns have led to a negative outlook for steel manufacturers. Revenues and average selling prices are lower, as the U.S. and global markets are in a gradual recovery. In the short term, we are negative on steel manufacturers like AK Steel Holding Corporation, Steel Dynamics Inc. (STLD) and Allegheny Technologies Incorporated (ATI).
AK Steel’s cost structure is higher than its peer group due to a greater reliance on an external supply of raw materials such as carbon scrap, purchased slabs, iron ore and purchased coke. Iron ore is the key raw material in steel manufacturing operations. The company expects to purchase about 6 million tons of iron ore pellets in 2010.
One of the largest and most diversified producers of specialty materials in the world, Allegheny Technologies has forecasted operating losses in the near-term. Allegheny has been battling cost-pressures associated with high raw material costs. For Allegheny, a hypothetical $1.00 per mmbtu increase in the price of natural gas would result in increased annual energy costs of about $10 to $12 million.
Costs of scrap and oil are also rising significantly. A change of $1.00 per pound in nickel prices would result in increased costs of about $80 million, while a hike of $0.01 per pound of ferrous scrap would result in increased costs of approximately $5 million.
We remain strongly negative on Steel Dynamics, the third-largest steel maker in the U.S., who is operating its structural steel mills at less than 40% of its total capacity due to uncertain demand conditions.
However, industry giants with integrated business models like U.S. Steel Corp and ArcelorMittal have an edge over their peers. Both steel makers have substantial captive sources of iron ore and coal and source about 75%–80% of their coke and iron ore requirements from owned and/or operated facilities. U.S. Steel Corp returned to profitability in the second quarter of 2010 on improving business conditions.
Similarly, earnings of Nucor Corporation, the largest recycler of steel scrap in the U.S. , broke out from the loss territory in the last quarter of 2009. We expect Nucor to exhibit strong profitability driven by long-term contracts, cost reduction efforts and a dominant acquisition strategy.
Collectively, ArcelorMittal, AK Steel, Allegheny Technologies, United States Steel Corporation and Nucor Corporation carry long-term Neutral recommendations, while Steel Dynamics has a long-term Underperform recommendation.
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Solid Quarter from Arrow – Analyst Blog
Electronic parts distributor Arrow Electronics Inc. (ARW) reported sales of $4.7 billion in the third quarter of 2010 up 27.0% year over year and up 1.0% sequentially, which surpassed the Zacks Consensus Estimate of $4.6 billion.
On a segment basis, Global components sales came in at $3.44 billion, up 35.3% year over year and 5.5% sequentially, driven by strong growth in Americas, European and core Asia-Pacific regions, which was partially offset by a slowdown in the low-end handset business in Asia-Pacific. Overall lead times are stabilizing with semiconductor products returning to more normal levels. Book-to-bill for this segment was 1.1.
Global enterprise computing solutions (ECS) recorded sales of $1.22 billion, down 10% sequentially but up 8% year over year driven by strong buying patters in the U.S., storage, software. In addition, industry standard servers grew strongly.
Arrow stated that overall IT spending rebounded and is estimated to be in the low single digits for the remainder of 2010. However, management expects that some pockets of IT are going to grow much faster than the overall IT market.
Margins
Gross margin came in at 13.1%, up from 11.5% in the year-ago quarter and 12.8% in the previous quarter, driven by solid increases in almost all its businesses in all the regions.
Operating margin came in at 4.0%, up from 1.2% in the year-ago quarter due to an improvement in gross margin as management continues to take steps to improve operational efficiency. Operating expenses (excluding restructuring charges) decreased 40 basis points year-over-year and increased 30 basis points sequentially to 8.8%.
Arrow reported a net income of $118.5 million or $1.00 per diluted share compared to a net income of $116.2 million or 96 cents per diluted share in the previous quarter and a net income of $12.6 million or 10 cents in the year-ago quarter.
Excluding loss on prepayment of debt and restructuring, integration, and other charges, net income came in at $128.0 million or $1.08, easily beating the Zacks Consensus Estimate of $1.01 and management’s estimate of $0.96–$1.06.
During the quarter, Arrow used $27 million of cash in operating activities and used $27.0 million in capital expenditures. The company repurchased $125 million of stock in the quarter, which left $75 million under the share buy-back program. Arrow also retired $70 million of debt. Arrow ended the quarter with cash and equivalents of $509.7 million, down from $576.7 million at the end of the previous quarter.
Guidance
Strong performance in the first nine months of 2010 encouraged management to provide a robust outlook for the fourth quarter. Going forward, management expects sales in the fourth quarter of 2010 to come between $5.0 billion and $5.4 billion.
Global components’ sales are projected between $3.32 and $3.52 billion. Global enterprise computing solutions sales are estimated between $1.67 billion and $1.87 billion. Earnings per share (excluding any one-time charges) are projected around $1.22–$1.32.
During the quarter, Arrow completed the acquisitions of Shared Technologies, Transim Technology Corporation and Eshel Technology Group. The company also announced agreements to acquire NuHo and the RF, Wireless and Power Division of Richardson Electronics.
Arrow expects that these acquisitions will expand its portfolio and build strategic capabilities such as value-added services to help meet the evolving needs of customers and suppliers.
Cumulatively, these acquisitions are expected to be accretive to earnings by 25 cents to 42 cents on an annual basis. In addition, acquisitions of Petsche, Converge, Verical and Sphinx are expected to boost the bottom line by 15 cents to 22 cents.
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Varian Beats EPS, Misses on Sales – Analyst Blog
Varian Medical Systems (VAR) reported fourth quarter and fiscal year 2010 (ended September 30) earnings per share from continuing operations of 87 cents and $2.96, beating the Zacks Consensus Estimates of 84 cents and $2.94, respectively, and exceeding the corresponding year-ago figures of 78 cents and $2.65.
Revenues
Varian posted total sales of $652 million (up 1.6% year over year) and $2.36 billion (up 7.3%) in the fourth quarter and fiscal 2010, respectively, falling short of the Zacks Consensus Estimates of $667 million and $2.37 billion.
Varian’s net orders increased 12% year over year to $777 million for the reported quarter and were up 10% to $2.6 billion for the fiscal year after excluding $62 million order for a proton therapy system that was cancelled.
After eliminating the proton order, the year-ending backlog was up 10% to $2.2 billion. Including the proton order in the year-ago periods, net orders rose 3% in the reported quarter and 5% in the fiscal year, and the year-end backlog increased 7% year over year.
Segment Revenue
Oncology Systems’ revenues in the reported quarter were $512 million, down 3% year over year. Net orders were $657 million, up 15%, with a 24% increase from North American markets and a 7% growth in overseas locations.
Varian received over 60 orders for the TrueBeam radiotherapy and radiosurgery systems during the reported quarter, thereby raising cumulative orders to over 125 units since its inception in the second quarter of 2010. Service continued to grow and constituted almost 30% of revenue and orders in the reported quarter.
X-Ray Products revenues were $107 million in the fourth quarter, up 16% year over year while net orders were $112 million, up 15%. The company stated that flat panel detectors, including its modern panels for digital radiography, were responsible for the spike in sales.
Orders for X-ray tubes also increased smartly during the reported quarter. Record sales volumes and a mix shift toward panel shipments were responsible for robust gross margin and record quarterly operating earnings.
Revenues of the “Other” category, which consisted of the Security and Inspection Products unit, the Varian Particle Therapy segment, and the Ginzton Technology Center, were $33 million, up 47%.
Margins
Varian reported gross margin of 42.4% in the reported quarter, down from 44.4% in the prior-year quarter. Operating margin, at 22.8%, was lower than 23.5% in the year-ago quarter.
Balance Sheet
Varian exited fiscal 2010 with a cash balance of $520 million, down 6% year over year and debt of $43 million, up 16.8%.
Outlook
The company believes that stronger order activity at the Oncology Systems segment in the second half of fiscal 2010 as well as current momentum in the X-Ray Products business will set the stage for better performance in fiscal 2011.
For the first quarter of fiscal year 2011, Varian expects total revenues to grow about 8% year over year. It guides earnings per share from continuing operations of 71 cents to 74 cents, up about 15% year over year.
For fiscal year 2011, the company projects revenues to increase about 10% to 11% and earnings per share from continuing operations to increase about 14% to a band of $3.34 to $3.39.
We currently have a Neutral long-term rating on Varian. The stock currently retains a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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Genworth Suffers 3Q Mortgage Loss – Analyst Blog
Genworth Financial Incorporation (GNW) reported third-quarter 2010 operating earnings of 6 cents, lagging the Zacks Consensus Estimate of 25 cents by a substantial 19 cents. Results were considerably lower than 18 cents reported in third-quarter 2009. Operating income was $29 million compared with $81 million in the year-ago period.
Higher year-over-year loss at the U.S. Mortgage Insurance segment as well as weak results at Retirement and Protection and at International resulted in the company’s soft performance.
Net income available to common shareholders was $83 million or 17 cents per share in the reported quarter compared with $19 million or 4 cents available to common shareholders in the year-ago period. Net income in the reported quarter included investment gains of $54 million compared with an investment loss of $62 million in the prior-year period.
Genworth’s total revenue improved 11.5% in the quarter to $2.67 billion from $2.39 billion in the prior-year quarter. Results surpassed the Zacks Consensus Estimate of $2.54 billion. An improvement in investment income as well as insurance and investment product fees largely drove the overall revenue climb.
Premium revenue at Genworth declined 3% year over year to $1.44 billion in the quarter. Net investment income increased 7.4% year over year to $815 million. Net investment gains were $105 million from a loss of $122 million in third-quarter 2009.
In the quarter under review, total benefits and expenses of Genworth declined 5.4% over the prior-year quarter to $2.5 billion.
Segment Update
Retirement and Protection: Net operating income declined to $111 million in the quarter from $134 million in third-quarter 2009. Earnings decline at Long Term Care and Life Insurance was primarily responsible for the slide.
International: Net operating income improved to $121 million in the quarter from $96 million in third-quarter 2009. Improved profit in Canada and Australia coupled with solid results from lifestyle protection from other international mortgage insurance largely contributed to the overall improvement.
U.S. Mortgage Insurance: Operating loss widened to $152 million compared with a loss of $116 million in the prior-year quarter. Higher reserves and increased new delinquencies affected results negatively.
Corporate and Other: Net operating loss was $51 million compared with an operating loss of $33 million in third-quarter 2009.
Financial Update
Cash, cash equivalents and invested assets of Genworth at the end of the quarter were $75.6 million compared with $69.2 million at the end of fourth quarter 2009.
Genworth’s long-term borrowings increased to $4.4 million at quarter-end from $3.6 million at the end of fourth-quarter 2009.
We expect the elevated unemployment rate to continue pressuring mortgage insurance business. Though the business is showing signs of improvement, the line is still experiencing losses. Additionally, the improvements in its other business lines are expected to be slow given the economy’s sluggish recovery.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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Solid 3Q for Cliffs – Analyst Blog
Stronger pricing and volumes helped mining company, Cliffs Natural Resources Inc., (CLF) post record revenues and earnings in the third quarter of 2010. Net earnings of $297.4 million or $2.18 per share in the third quarter were an over four-fold increase from last year’s $58.8 million or 45 cents. However, earnings missed the Zacks Consensus Estimate of $2.59 per share.
Quarterly revenues more than doubled to $1.3 billion from $666.4 million in the year-ago period on higher pricing and improved sales volumes across all businesses, especially in North America, driven by improving demand from steel makers. However, revenues were below the Zacks Consensus Estimate of $1.5 billion.
Segment Performance
North American Iron Ore: Revenues from the segment climbed 34% year over year to $105.07 per ton on higher seaborne iron ore prices and hot band steel prices. Additionally, Cliffs revised its initial estimate to fit in with the increase in seaborne iron ore pellet price from an average increase of 90% to about 96% over the 2009 settlement price, which also triggered revenue growth.
Sales volumes jumped 37% to 7.6 million tons on higher demand for iron ore pellets. Higher demand was attributable to the North American steel industry capacity utilization, which improved to around 70% in the third quarter 2010 from 49% - 59% in the third quarter of 2009.
Cost per ton in the segment inched up 7% to $66.92 from $62.28 in the year-ago quarter due to higher royalties, offset by lower energy-related costs and idle expenses.
North American Coal: Revenues jumped 22% year over year to $117.64 per ton in the third quarter of 2009 while adjusted costs declined 17% to $117 per ton. North American Coal sales volume increased by a whopping 185% to 977,000 tons driven by additional sales from the recent acquisition of INR Energy’s coal operations.
A 52% increase in sales volume was driven by Cliffs’ legacy coal assets. However, Cliffs’ Pinnacle and Oak Grove mines both experienced adverse geological conditions, which led to poor production volumes and lower than expected third-quarter sales.
Asia-Pacific Iron Ore: Third-quarter 2010 Asia Pacific Iron Ore sales volume was up 12% to 2.3 million tons. Revenue per ton in Asia-Pacific Iron Ore more than doubled to $128.09, compared with $62.71 in 2009 on higher prices in the seaborne market. Cost of goods sold increased 5% to $55.20 per ton in the third quarter.
During the third quarter, Cliffs raised $1 billion in debt, which it plans to use for offloading other borrowings. As of September 30, 2010, long-term debt totaled to $1.7 billion compared with $525 million as of December 2009. Cash and cash equivalent amounted to $969.4 million as of September 30, 2010, higher than $502.7 million as of December 2009.
Outlook
Cliffs expects steady demand for the rest of 2010 and into 2011 with steel utilization rates remaining stable. Below is the company’s guidance for each of its business segments.
North American Iron Ore Outlook
Cliffs expects North American Iron Ore sales volume of about 27 million tons in 2010. Revenue has been estimated at about $98 - $103 per ton, down from the previous expectation of $107 - $112. Cliffs expects production of about 26 million tons in 2010.
Cost-per-ton is expected at $65 - $70. Cliffs’ has fixed a final pricing for about 60% of its 2010 expected sales volume. Under the supply agreements, final pricing is based on an average iron ore settlement price increase of 96% over the 2009 seaborne price. In 2011, Cliffs expects to produce and sell about 27 million tons from its North American Iron Ore business.
North American Coal Outlook
Cliffs has slashed its 2010 North American Coal sales and production volume expectation to 3.6 million tons from its prior expectation of 3.9 million tons due to continued adverse geological conditions experienced at its legacy mines. The product split is expected to be 500,000 tons of thermal coal and 3.1 million tons of metallurgical coal.
Full-year revenues are expected at $115 - $120 per ton. Cost-per-ton is likely to rise to $120 - $125 from the initial guidance of $115 - $120. In 2011, Cliffs expects to produce and sell about 6.5 million tons from its North American Coal business, including 5.5 million tons of metallurgical coal and 1.0 million tons of thermal coal.
Asia Pacific Iron Ore Outlook
Cliffs raised its 2010 Asia-Pacific Iron Ore sales and production volume forecasts to 9 million tons on higher production from its Cockatoo Island joint venture in Western Australia. Cliffs expects higher 2010 revenue at its Asia Pacific Iron Ore, near about of $115 - $120 per ton, up from $110 - $115. Costs are expected to be $55 - $60 per ton, unchanged from previous guidance. In 2011, Cliffs expects to produce and sell about 9.0 million tons from its Asia Pacific Iron Ore business.
Although Cliffs posted stronger third quarter results, it fell short of the Zacks Consensus Estimates, both on the earnings and revenues front. Analysts and investors were bearish on the stock since it missed its second quarter consensus estimate. Similar apprehensions of missing the consensus estimate drives the short-term (1 to 3 months) Zacks #4 Rank (Sell).
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